KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT. kpmg.ca

Transcription

1 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT kpmg.ca

2 LETTER FROM THE CANADIAN MANAGING PARTNER, AUDIT KPMG LLP is committed to providing our clients with the highest quality of professional services, and to providing those services in an ethical and responsible manner. This means compliance not only with the requirements of Canadian regulators, but also those regulators outside of Canada in jurisdictions where our clients securities are listed. We have worked very hard to develop rigorous quality control standards and processes, as are reflected in this Transparency Report. We take great pride in the quality of the professional services we provide to our clients. This 2014 Transparency Report describes the numerous steps which KPMG LLP takes to comply with its legal, regulatory and professional responsibilities. This 2014 Transparency Report sets out the structure, governance, process and approach to audit quality control utilized by KPMG LLP in serving our clients and fulfilling our responsibilities. It reflects our approach to continuously improving our audit quality control processes and procedures through frequent monitoring and inspection, as well as through ongoing professional training and development. With the 2014 Transparency Report, we aim to help regulators, clients and future clients further understand our ongoing responsibility to provide the highest quality standards in our audit practice. John A. Gordon Canadian Managing Partner, Audit KPMG LLP

3 Table of Contents WHO WE ARE... 2 Our Business... 2 Our Strategy... 2 OUR STRUCTURE AND GOVERNANCE... 3 Legal Structure... 3 Name and Ownership... 3 Governance Structure... 3 SYSTEM OF QUALITY CONTROL... 5 Tone at the Top... 6 Association With The Right Clients... 8 Clear Standards and Robust Audit Tools Recruitment, Development and Assignment of Appropriately Qualified People Commitment to Technical Excellence and Quality Service Delivery Performance of Effective and Efficient Audits Commitment to Continuous Improvement Statement of Effectiveness of Audit Quality Controls FINANCIAL INFORMATION INTERNATIONAL NETWORK ARRANGEMENT Legal Structure Responsibilities and Obligations of Member Firms Professional Indemnity Insurance Governance Structure Area Quality & Risk Management Leaders PUBLIC INTEREST ENTITY AUDIT CLIENTS... 25

4 2 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT WHO WE ARE Our Business KPMG Canada 1 is a professional services firm that operates through three functional service lines Audit, Tax, and Advisory and is organized along 10 industry groups: Consumer Markets; Energy; Financial Services; Industrial Markets; High Growth Markets; Private Equity; Public Sector; Building, Construction and Real Estate; Mining and Technology, Media and Telecommunications. We have over 5,600 people located in 33 office locations, including over 700 partners. Full details of the services offered by KPMG Canada can be found on our website at Our Strategy KPMG Canada s strategy is set by its Board of Directors (the Board ) and Management Committee, which have determined that our overall strategy is designed to ensure we will be recognized as The Envy of the Professional Services Firms among all organizations that rely on skilled, educated professionals to deliver advice to clients. It is the quality of our relationships, and our skill at continuously building and enhancing them, that differentiates KPMG Canada in the marketplace. 1 Throughout this document, KPMG Canada (as well as we, our and us ) refers collectively to KPMG LLP, a Canadian limited liability partnership established under the laws of Ontario, and its affiliates. KPMG LLP is the Canadian member firm affiliated with KPMG International Cooperative, a Swiss entity ( KPMG International ). KPMG International provides no client services. 2

5 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT 3 OUR STRUCTURE AND GOVERNANCE Legal Structure KPMG Canada is a Canadian limited liability partnership formed under the laws of Ontario. It is wholly owned by its partners. KPMG Canada is affiliated with KPMG International Cooperative ("KPMG International"), a Swiss cooperative which is a legal entity formed under Swiss law. Further details about KPMG International and its business, including our relationship with KPMG International, are available in the 2014 KPMG International Transparency Report, which can be found online at the following link: out/governance/documents/transpa rency-report-2014v2.pdf Name and Ownership KPMG is the registered trademark of KPMG International, and is the name by which KPMG member firms are commonly known. The rights of member firms to use the KPMG name and marks are contained within agreements with KPMG International. Member firms are generally locally owned and managed. Each member firm is responsible for its own obligations and liabilities. KPMG International and other member firms are not responsible for a member firm s obligations or liabilities. Governance Structure KPMG Canada has two principal governing documents: a Partnership Agreement and Operating Procedures. Together, these documents establish the structure and principal procedures of governance for KPMG Canada. The key governance and management bodies of KPMG Canada are the Management Committee and the Board. Management Committee The Management Committee consists of the Chief Executive Officer and Senior Partner, the Managing Partners, and such additional partners as may be determined from time to time by the Chief Executive Officer and Senior Partner. The Management Committee has the overall responsibility for managing KPMG Canada, including the quality, strength and profitability of the firm s operations. Members of the Management Committee are appointed for an indefinite term until removal by the Chief Executive Officer and Senior Partner. The Board KPMG Canada s business, property and affairs are managed under the direction of the Board. The Board is responsible for the firm s stewardship, including oversight of strategic planning, risk management and succession planning, as well as the appointment of the Chair and the Deputy Chair of the Board. The Board is comprised of the Chief Executive Officer and Senior Partner and 17 individual partners. Except for the Chief Executive Officer and Senior Partner, upon the appointment of any member of the Board to the Management Committee, such person shall automatically cease to be a member of the Board. With the exception of the Chief Executive Officer and Senior Partner whose initial term is 5 years, members of the Board are appointed for a 3 year term, and are nominated by the Nominating Committee. Board members are eligible for election for two full consecutive terms only. Key Governance Committees The Board has 5 main subcommittees that deal with key aspects of the governance of KPMG Canada. These are the Succession Committee, the Operations & Finance Committee, the Partner Compensation Committee, the Communications & Governance Committee, and the Nominating Committee. Succession Committee The role and responsibility of the Succession Committee is to review the processes and procedures regarding the development of future leaders, including client service leaders, industry leaders and firm management. The Succession Committee is comprised of five 3

6 4 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT members, or such other number of members as shall be specified by the Board, who are appointed by the Board for a one year term. The Succession Committee meets a minimum of one time per year, and may call special meetings as required. Operations & Finance Committee The role and responsibility of the Operations & Finance Committee is to review the strategic direction set by the Management Committee and to ensure the annual business plan and the financial plan of the firm reflect these strategies. The Operations & Finance Committee is comprised of five members, or such other number of members as shall be specified by the Board, who are appointed by the Board for a one year term. The Operations & Finance Committee meets a minimum of one time per year, and may call special meetings as required. Partner Compensation Committee The role and responsibility of the Partner Compensation Committee is to review the Management Committee s annual recommendations for compensation to all partners, the Management Committee, and the Chief Executive Officer and Senior Partner, in accordance with the Partnership Agreement and Operating Procedures. The Partner Compensation Committee is comprised of five members, or such other number of members as shall be specified by the Board, who are appointed by the Board for a one year term. The Partner Compensation Committee meets a minimum of one time per year, and may call special meetings as required. Communications & Governance Committee The role and responsibility of the Communications & Governance Committee is to provide direction and oversee KPMG Canada s approach to governance matters, including recommendation to the Board of appropriate governance processes and structures, reviewing the requirements for committees of the Board, and monitoring compliance with recognized governance guidelines. The Communications & Governance Committee is comprised of five members, or such other number of members as shall be specified by the Board, who are appointed by the Board for a one year term. The Communications & Governance Committee meets a minimum of one time per year, and may call special meetings as required. Nominating Committee The role and responsibility of the Nominating Committee is to assist the Board in recruiting appropriate partners to serve on the Board. The Nominating Committee is comprised of 3 members of the Board and 4 partners from the firm at large. Nominating Committee members who are members of the Board are appointed by the Board for a one year term, while Nominating Committee members who are partners at large are nominated by the Nominating Committee for a 4 year term. The Nominating Committee meets a minimum of one time per year, and may call special meetings as required. Chief Executive Officer and Senior Partner The Chief Executive Officer and Senior Partner is a member of the Board and the Chair of the Management Committee. The Chief Executive Officer and Senior Partner is responsible for the direction of the activities and policies of KPMG Canada, appoints the members of the Management Committee, and recommends to the Board the allocation of profits to members of the Management Committee. The initial term of the Chief Executive Officer and Senior Partner is 5 years, with eligibility for reappointment for one additional term of 3 years.

7 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT 5 SYSTEM OF QUALITY CONTROL KPMG International has policies of quality control that apply to all KPMG member firms. These policies and associated procedures are designed to guide member firms in complying with relevant professional standards, regulatory and legal requirements, and in issuing reports that are appropriate in the circumstances. Quality control and risk management are the responsibility of all KPMG Canada personnel. This responsibility includes the need to understand and adhere to KPMG member firm policies and associated procedures in carrying out our day-to-day activities. KPMG Canada has a system of quality controls for our audit practice that is designed to meet not only the requirements of Canadian law, securities regulators rules, and professional standards, but also to reflect our drive and determination to deliver independent, unbiased advice and opinions. Our training, our processes, and our systems and controls are all designed to achieve objective independent advice and opinions on which shareholders can rely. Our system encompasses the firm s organizational structure and the policies and procedures established to ensure compliance with applicable Canadian legislation, professional standards, firm policies, and US Public Company Accounting Oversight Board ( PCAOB ) and US Securities and Exchange Commission ( SEC ) rules where relevant. While many KPMG Canada quality control processes are crossfunctional and apply equally to Tax and Advisory work, the focus of this section is on explaining what we do to achieve the highest quality in the Audit work performed by our firm. In this section we therefore focus on our system of audit quality control. At KPMG Canada, audit quality is not just about reaching the right opinion, but how we reach that opinion. It is about the processes, thought and integrity behind the audit report. KPMG Canada views the outcome of a quality audit as the delivery of an appropriate and independent opinion in compliance with applicable auditing standards. This means, above all, being independent, compliant with relevant legal and professional requirements, and offering insight and impartial advice to our clients. In order to deliver an appropriate and independent opinion, we utilize the KPMG global audit methodology. We also utilize the KPMG Audit Quality Framework, which we use to describe, focus on and enhance audit quality for the benefit of all our stakeholders. The Audit Quality Framework identifies seven drivers of audit quality: Tone at the top Association with the right clients Clear standards and robust audit tools Recruitment, development and assignment of appropriately qualified professionals Commitment to technical excellence and quality service delivery Performance of effective and efficient audits Commitment to continuous improvement Tone at the top sits at the core of the Audit Quality Framework s seven drivers of audit quality and helps ensure that the right behaviours permeate across the KPMG network. The other key aspects of our system of quality control then operate within a virtuous circle, with each driver of the model reinforcing the others. Each of these key drivers of our quality control system is described in more detail in the following sections of this report. 5

8 6 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT Tone at the Top Our leadership clearly demonstrates and communicates their commitment to quality, ethics and integrity. KPMG Canada s tone at the top provides a clear focus on quality through: Culture, values, and Code of Conduct - clearly stated and demonstrated in the way we work Focused and well-articulated strategy - incorporating quality at all levels Standards set by leadership Governance structure and clear lines of responsibility for quality - skilled and experienced people in the right positions to influence the quality agenda Integrity is a critical characteristic that stakeholders expect and rely on. It is also the key KPMG Core Value above all, we act with integrity. We have a Code of Conduct which incorporates our core values and addresses the commitments that we make as well as the responsibilities of our personnel at all levels across our firm. This commitment underlies our valuesbased compliance culture, where individuals are encouraged to raise their concerns when they see behaviours or actions that are inconsistent with our values or professional responsibilities. An Ethics and Compliance Hotline is available for KPMG Canada personnel, clients, and other parties to confidentially report concerns. Staffed by an independent thirdparty provider, the hotline is an important addition to the other mechanisms already available to help KPMG Canada people in reporting concerns about possible illegal, unethical or improper conduct at the firm. We encourage use of this facility as an alternative means for reporting concerns when the normal channels of communication have proven ineffective or are impractical under the circumstances. Normal channels would include the person s performance manager or a higher-level manager, human resource manager, Business Unit Professional Practice partner, or Department of Professional Practice ( DPP ). Callers may choose to identify themselves or remain anonymous. Callers reports are handled confidentially, and no retaliation or retribution of any kind is permitted against anyone who, in good faith, submits a concern or participates in an investigation. KPMG Core Values We lead by example. We work together. We respect the individual. We seek the facts and provide insight. We are open and honest in our communication. We are committed to our communities. Above all, we act with integrity. At all levels we act in a way that exemplifies what we expect of each other and our clients. We bring out the best in each other and create strong and successful working relationships. We respect people for who they are and for their knowledge, skills and experience as individuals and team members. By challenging assumptions and pursuing facts, we strengthen our reputation to provide insight as trusted and objective business advisers. We share information, insight and advice frequently and constructively and manage tough situations with courage and candor. We act as responsible corporate citizens by broadening our skills, experience and perspectives through work in our communities. We are constantly striving to uphold the highest professional standards, provide sound advice and rigorously maintain our independence.

9 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT 7 Leadership Responsibilities for Quality and Risk Management Our Canadian Managing Partner ( CMP ) of Audit, who reports to the CEO of the firm, has ultimate responsibility for our audit practice, which includes our system of audit quality control. Our National Managing Partner in Charge of Professional Practice, who reports to the CMP of Audit, has overall responsibility for accounting and auditing standards and their interpretation, promoting technical excellence and quality service delivery through training and accreditation, investment in technical support, development of accounting and auditing specialist networks, and effective consultation processes. Our National Partner in Charge of Audit Quality works with the CMP of Audit and National Managing Partner in Charge of Professional Practice to initiate, shape and lead our initiatives to enhance the quality and effectiveness of our audit practice, and to provide ongoing support to our audit activities across the country. Audit Quality and Professional Practice Network The Audit Quality and Professional Practice Network consists of more than 130 partners, senior managers, and other professionals who support the firm s audit professionals in meeting their responsibilities in the areas of auditing and attestation, accounting and financial reporting, securities including Canadian and SEC reporting matters, and continuous improvement in audit quality. DPP DPP develops firm standards and guidance relating to accounting, auditing, securities and quality matters. DPP provides technical guidance to engagement teams on engagement-specific issues; develops and disseminates topicspecific guidance on emerging technical, professional and quality issues; and assists with firm and individual issues pertaining to compliance with regulatory and professional standards. Through liaisons with the KPMG International Standards Group, as well as active participation in standards-setting processes in Canada, DPP professionals develop and represent KPMG Canada s positions on current topics being addressed by regulatory and other standardssetting bodies. In addition, DPP professionals actively liaise with the KPMG International Standards Group, located in London, on international accounting and auditing standards matters and with professionals in the US member firm s Department of Professional Practice, located in New York, on accounting and auditing standards matters related to the Financial Accounting Standards Board, the PCAOB, the Emerging Issues Task Force, and the Auditing Standards Board of the American Institute of Certified Public Accountants. Professional Practice Partners The audit practice is supported by a network of professional practice partners. These senior partners provide professional practice and quality leadership and direct adherence to firm policies and professional standards within their respective offices and regions. The roles of our professional practice partners are to: (1) support and advise the partners on client-related matters, (2) assimilate information pertaining to the professional risks of the firm, (3) provide reasonable assurance that firm policies and professional standards are followed, and (4) continuously review and seek to improve firm quality, policies and processes. Local Audit Quality groups and our Accounting and Audit Technical Topic Teams in the various geographies support the activities of our professional practice partners, by assisting teams in conjunction with DPP in resolving accounting and auditing matters and enhancing audit quality. Audit Quality Council The Audit Quality Council, chaired by the CMP of Audit, provides input to and oversight of issue identification, analysis, and remediation relating to the most significant matters relative to audit quality and our system of audit quality control. The Audit Quality Council oversees the following activities: Accumulating and analyzing information relative to audit quality matters on a timely and consistent basis (e.g., from internal and external inspections, DPP consultations, litigation and regulatory matters, etc.) Analyzing such information and identifying common themes and related root causes Participating in the development of appropriately focused remedial actions in response to those root causes

10 8 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT Monitoring the timely implementation, execution, and effectiveness of the remedial action plans In addition, the Audit Quality Council with the support of the local Business Unit Professional Practice Partners provide support for purposes of identifying particular characteristics of our audit engagement portfolio for which proactive risk assessment plans are developed (e.g., entities or industry sectors exhibiting higher risk characteristics). Engagement Quality Control Review Partners The engagement quality control review ( EQCR ) partner, who has the appropriate experience and knowledge, is responsible for performing objective reviews of the financial statements, auditors reports, and certain audit documentation. These individuals are the firm s top technical partners and are knowledgeable and experienced in accounting and reporting matters and auditing standards. Engagement quality control review partners review selected audit documentation to assist the engagement team in determining whether sufficient appropriate audit evidence has been obtained, the appropriateness of the financial statements and related disclosures, the key conclusions of the engagement team with respect to the audit, and the auditors reports to be issued. Completion of an engagement quality control review is documented when the engagement quality control review partner is satisfied that all significant questions raised have been satisfactorily resolved. Association With The Right Clients Acceptance and Continuance of Clients and Engagements Rigorous client and engagement acceptance and continuance policies and processes are vital to providing quality professional services and to protect KPMG Canada s reputation and support its brand. Canadian securities regulators rules and similar SEC rules for SEC-registered companies as well as Provincial Institutes of Chartered Accountants require that the audit committee pre-approve services rendered by the issuer s principal auditor. Engagements performed by the firm are subject to written contract or engagement letters that define terms and conditions of the engagement. For engagements involving the audit of an issuer s financial statements, the Audit Committee Chair and the Chief Executive Officer or Chief Financial Officer execute the agreement. For other engagements, after preapproval in accordance with the policies of the audit committee, a member of the client s management with the authority to engage KPMG Canada generally executes the contract or engagement letter. It is the responsibility of the Lead Audit Engagement Partner ( LAEP ) to ensure that the audit committee of each public company audit client has pre-approved all services. To facilitate compliance with all applicable pre-approval requirements, KPMG Canada has made use of Sentinel, a web-based tool that is mandatory for all KPMG member firms worldwide, prior to accepting an engagement. This tool helps engagement partners and

11 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT 9 managers to determine whether pre-approval is required and, if so, allows for the electronic submission of a request for pre-approval to the appropriate LAEP. Reports from Sentinel enable the LAEP to monitor engagements and fees billed, thus facilitating compliance with any audit committee requirements. Prospective Client and Engagement Evaluation Process Prior to accepting a new audit engagement, a partner performs an evaluation of the entity and its principals, its business, and engagement-related matters, as appropriate. This evaluation typically includes a background investigation of the entity and selected senior management personnel. Factors considered during the acceptance process include, but are not limited to: Client-related matters: financial strength, reputation, accounting policies and practices, and character and competency of management personnel Business-related matters: industry, products, and competitors Service-related matters: firm and engagement team competency and technical risk associated with services requested Independence-related matters: employment-related matters, financial relationships, investments, loans, and nonaudit services Potential conflicts of interest Engagement teams proposing to perform a new audit engagement are required to perform a series of procedures including a review of non-audit services provided to the potential audit client. Any potential independence issues and conflicts identified are resolved in consultation with other parties, and the resolution of all matters is documented. Before agreeing to pursue the engagement, the parties involved in the professional service are notified of the potential conflict of interest. Resolution of potential conflicts requires approval from a second party, which could include the professional practice partner, Sentinel conflicts resolver, or the functional risk management group, before signing the initial audit engagement letter. If the engagement is accepted, it may be necessary to establish ethical dividers with respect to the professionals assigned and to communicate with appropriate parties. If a potential independence issue or conflict cannot be resolved satisfactorily, in accordance with professional and firm standards, the prospective client or engagement is declined. Prospective audit engagement evaluations require approval of the professional practice partner and the business unit partner in charge. New SEC audit engagements require additional approvals by the Ethics and Independence Partner. Continuance Process Engagement partners are required to review and evaluate their existing audit and attestation clients with their professional practice partner at least annually. A client continuance evaluation is a process of formal approvals by various parties. The objective of these reviews is to identify those clients where the firm should consider implementing additional safeguards to address audit risk and those instances where we should discontinue our professional association with the client. In addition, certain factors that require additional evaluation procedures to be conducted include, but are not limited to: New legal, regulatory, or professional requirements that alter our reporting responsibilities and professional risks A significant change in the nature, size, or structure of a client s business A significant change in ownership A significant change in client management, directors, principal owners, or other key personnel A significant, adverse change in the perceived integrity of current management or principal owners A significant, adverse change in the financial performance of the client Particular audit findings (e.g., material weaknesses in internal control not being addressed by management or material proposed adjustments to financial statements) An existing non-public audit client plans to become a reporting issuer A restatement of financial statements Investigation of the client by a regulatory body or its audit committee that involves a current member of management

12 10 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT An updated client continuance evaluation is required if a client or engagement risk factors change significantly during the year. Client Portfolio Management KPMG Canada s leadership allocates engagement partners that have the appropriate competence, capabilities, time and authority to perform the role. Each partner s client portfolio is regularly reviewed to ensure that risks are being appropriately managed. Clear Standards and Robust Audit Tools Professional practice, risk management and quality control are the responsibilities of every KPMG Canada professional. We expect our professionals to adhere to the clear policies and procedures (including independence policies) we set, and we provide a range of tools to support them in meeting these expectations. The policies and procedures we set for Audit incorporate the relevant requirements of accounting, auditing, ethics, quality control standards, and other relevant laws and regulations. Audit Methodology and Tools We dedicate significant resources to keeping our standards and tools complete and up to date. The KPMG global audit methodology, developed by KPMG International s Global Service Centre ( GSC ), is based on the requirements of International Standards on Auditing ( ISAs ) and/or the PCAOB. The methodology is set out in the KPMG Audit Manual ( KAM ) and includes additional requirements that go Our audit methodology encompasses the following workflow: Planning Perform risk assessment procedures and identify risks Determine audit strategy to respond to identified risks Determine planned audit approach to respond to identified risks Control Evaluation: Understand accounting and reporting activities Evaluate design and implementation of selected controls (when applicable) Test the operating effectiveness of selected controls (when applicable) Assess control risk (when applicable) and risk of significant misstatement Substantive Testing Plan substantive procedures to respond to the risk of significant misstatement Perform substantive procedures Consider if audit evidence is sufficient and appropriate Completion Perform completion procedures, including an overall review of the financial statements Perform overall evaluation Form an audit opinion Communicate to the audit committee or those charged with governance our responsibilities under applicable professional standards beyond the ISAs and the PCAOB rules where it is believed these requirements enhance the quality of our audits. Where applicable, the KPMG audit methodology incorporates both the audit of financial statements and the audit of internal control over financial reporting. Our audit methodology is supported by eaudit, KPMG International s electronic audit tool, which provides auditors worldwide with the methodology, guidance, and industry knowledge needed to perform efficient, high-quality audits. eaudit s activity-based workflow provides engagement teams with ready access to relevant information at the right time throughout the audit, thereby

13 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT 11 enhancing efficiency and delivering value to our audit clients. Independence, Integrity, Ethics and Objectivity Overview We have adopted the KPMG Global Independence Policies, which are derived from the International Ethics Standards Board for Accountants ( IESBA ) Code of Ethics and incorporate, as appropriate, SEC, PCAOB, American Institute of Certified Public Accountants ( AICPA ) and other applicable regulatory standards. These policies are supplemented by other processes to ensure compliance with the standards issued by the Provincial Institutes of Chartered Accountants. These policies and processes cover areas such as firm independence (covering, for example, treasury and procurement functions), personal independence, postemployment relationships, partner rotation, and approval of audit and non-audit services. Our firm has a designated Ethics and Independence Partner ( EIP ) supported by a core team of specialists to help ensure that we apply robust and consistent independence policies, processes and tools. Ethics and independence policies are communicated through the issue of bulletins and an annual training program. If applicable, amendments to the ethics and independence policies in the course of the year are communicated through the use of practice alerts and are incorporated in regular Risk Management communications. To help ensure ethical conduct, including integrity and independence, our firm and its personnel must be free from prohibited financial interests in, and prohibited business relationships with, audit clients, their management, directors, and significant owners. KPMG practices risk prevention by managing and controlling risk, which includes our disciplinary policy. For instance, in the event of a failure to comply with relevant independence policies, whether identified in the rolling compliance review, self-declared or otherwise, professionals are subject to an independence disciplinary policy. Matters arising are factored into promotion and compensation decisions. KPMG s quality and risk management policies for Canada are documented in the KPMG Quality and Risk Management Manual, which provides both the policies and guidance to implement them. The manual is based on the Global Quality and Risk Management Manual, which is approved by the authority of the Global Quality and Risk Management Steering Group and applies to all KPMG member firms. The manual maintains quality and risk management policies that conform to, or exceed KPMG's international policies, along with consideration of requirements of the Provincial Institutes/Ordre of Chartered Accountants in Canada and where applicable, the rules of the SEC and the PCAOB. This manual is designed to provide policies and guidance to all KPMG LLP professionals to enhance the quality of service provided to our clients. Quality and Risk Management policies set out in the manual are to be complied with by

14 12 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT all KPMG personnel regardless of function or industry. Personal Independence Our professionals are responsible for making appropriate inquiries to ensure that they do not have any personal financial, business or family interests that are restricted for independence purposes. In common with other member firms of KPMG International, we use a webbased independence tracking system to assist our professionals in their compliance with personal independence investment policies. This system contains an inventory of publicly available investment products. Partners and client-facing managers are required to use this system prior to entering into an investment to identify whether they are able to do so. They are also required to maintain a record of all of their investments in the system, which automatically notifies them if their investments subsequently become restricted. Our firm monitors compliance with this requirement by performing regular audits of a sample of partners and managers. Examples of KPMG Canada s personal independence policies include: Each professional is responsible for maintaining his or her personal independence. No partner or covered person (any staff member who has any involvement in the audit or any management group staff member who provides non-audit services to the client except where clearly insignificant) may have a direct or material indirect investments in audit clients and their affiliates. Certain other financial relationships (e.g., loans, credit cards, and brokerage accounts) and certain business relationships with certain audit clients or their affiliates are either prohibited or subject to limitations. Close family members of current KPMG Canada partners and employees on engagement teams may not hold certain accounting and financial reporting roles within audit clients and their affiliates. Former KPMG Canada professionals may join certain public company audit clients in a financial reporting oversight role only after an appropriate waiting period. KPMG Canada professionals are required to promptly report any discussions or contacts between them and an audit client regarding possible employment in an accounting or financial reporting oversight role, and to cease to have any involvement in the audit engagement. If a KPMG Canada professional accepts employment with an audit client, the ongoing engagement team must give active consideration to the appropriateness or necessity to modify the audit procedures to adjust for the risk of circumvention by the former firm member. Independence Training and Confirmations Our firm provides all relevant personnel (including all partners and client service professionals) with annual independence training appropriate to their level and function, and provides all new personnel with relevant training when they join. The firm requires all partners, members of the management group, and other professional staff to affirm their independence through our annual independence training and declaration of compliance. This declaration is signed upon hire, every year thereafter, and at time of promotion to partner. In addition, the declaration is used to confirm the individual s compliance with, and understanding of, KPMG Canada s independence policies. The firm s Risk Management group reviews and resolves questions and apparent violations that may be reported on the declaration. A compliance team from the DPP performs periodic testing of compliance with our independence policies. The firm s policies also address disciplinary actions in the event of individual non-compliance with its independence policies. Such actions vary based on the event and may include dismissal, depending on the severity of the violation. Audit Partner Rotation Audit partners are subject to periodic rotation of their responsibilities for audit clients under applicable independence rules. Partners are subject to Canadian requirements and, where relevant, SEC rules relating to the rotation of audit engagement partners. Under these rules, the LAEP and the EQCR partner assigned to a public company audit engagement must rotate after serving in either of these roles for seven years (five years for SEC registrants). They are then subject to a five-year time-out period after rotation. All other audit partners who are subject to the rotation

15 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT 13 requirements (e.g., lead audit partners on significant subsidiaries and other audit partners at the issuer level) must rotate after seven years and are subject to a two-year time-out period. Our firm monitors the rotation of partners, which also assists them to develop transition plans that help to deliver a consistent quality of service to clients. The rotation monitoring is subject to compliance testing. Non-Audit Services Our firm has policies regarding the scope of non-audit services that can be provided to audit clients. Additionally, KPMG Canada policies require the consideration by the LAEP of the threats arising from the provision of non-audit services and the safeguards available to address those threats. KPMG International s proprietary system, Sentinel, facilitates compliance with these policies. LAEP s are required to maintain group structures for their publiclytraded and certain other audit clients and their affiliates in the system. Every engagement entered into by any KPMG member firm is required to be included in the system prior to starting work. The system then enables the LAEP for restricted entities to review and approve, or deny, any proposed service wherever in the world the service is proposed to be provided and wherever the KPMG member firm is based. In accordance with applicable auditor independence rules, none of our audit partners are compensated on their success in selling non-audit services to their audit clients. Fee Dependency KPMG Canada s policies recognize that self-interest or intimidation threats may arise when the fees from a specific audit client represent a large proportion of our total fees as a firm. In particular, our policies require that in the event that the total fees from a public interest entity audit client and its related entities were to represent more than 10% of our total fees as a firm for two consecutive years, a senior partner from another KPMG member firm would be appointed as the EQCR reviewer. This would also be disclosed to those charged with governance at the audit client. We currently do not have any clients that meet this criterion. Business Relationships/Suppliers Our firm has policies and procedures in place that are designed to ensure that business and supplier relationships are maintained in accordance with all applicable laws, regulations and professional standards. Compliance with these policies and procedures is reviewed periodically. Conflicts of Interest Conflicts of interest may prevent our firm from accepting or continuing an engagement. Sentinel is used to identify and manage potential conflicts of interest within and across KPMG member firms. Any potential conflict issues identified are resolved in consultation with other parties as applicable, and the resolution of all matters is documented. An escalation procedure exists in the case of dispute between KPMG member firms. If a potential conflict issue cannot be resolved, the engagement is declined or terminated. When we become aware of a potential conflict of interest, the engagement partner discusses the situation with the DPP and/or the General Counsel s Office. Generally, before agreeing to pursue the engagement, the parties involved in the professional service are notified of the potential conflict of interest and, if the conflict can be appropriately managed or resolved, the engagement is further evaluated using the firm s normal engagement acceptance process. It may be necessary to apply specific procedures to manage the potential for a conflict of interest so that the confidentiality of our clients affairs is maintained. Such procedures may, for example, include establishing formal ethical dividers between engagement teams serving different clients and making arrangements to monitor the operation of such dividers. Anti-Bribery and Corruption Our firm provides anti-bribery and corruption training to all clientfacing partners and employees, as well as certain other personnel. In addition, certain non-client-facing personnel who work in finance, procurement or sales and marketing, and who are at the manager level and above, are also required to participate in antibribery training. Recruitment, Development and Assignment of Appropriately Qualified People One of the key drivers of Audit quality is ensuring the assignment

16 14 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT of professionals with the skills and experience appropriate to the client. This requires recruitment, development, promotion and retention of our professionals and robust capacity and resource management processes. Recruitment All candidates applying for professional positions are required to submit an application and may only be employed following a variety of selection processes, which may include application screening, competency-based interviews, and qualification/ reference checks. Upon joining our firm, new personnel are required to participate in a comprehensive onboarding program, which includes training in areas such as ethics and independence. This also includes ensuring that any issues of independence or conflicts of interest are addressed before the individual s employment or partnership commences. Personal Development It is important that all professionals have the necessary business and leadership skills to be able to perform quality work, in addition to technical skills. We provide opportunities for professionals to develop the skills, behaviours and personal qualities that form the foundations of a successful career in auditing. Courses are available to enhance personal effectiveness and develop technical, leadership and business skills. We further develop our personnel for high performance through coaching and mentoring on the job, stretch assignments, and country rotational and global mobility opportunities. Individual professional development goals are established as part of the annual goal setting process. The firm s professionals meet their continuing professional education ( CPE ) requirements and professional development goals through various professional development courses, including local office and national training courses. We have established policies to ensure that all professional members of the firm maintain their technical competence and meet all regulatory and professional standards. In accordance with these requirements, each audit professional must earn at least 20 hours of CPE credits each year and 120 hours in any three-year period. To assist individuals in meeting these requirements, as well as the requirements of their provincial institute/ordre, the firm provides continuous learning opportunities. Our training and development programs include course prerequisites, proficiency tests, and varied delivery methods including self study modules, classroom courses, and web-based seminars in real time. Audit quality is continually emphasized to our professionals through timely training and communication of accounting, auditing and reporting matters. The firm has developed a system to enable firm members to track CPE credits earned on an annual and triennial basis. Performance Evaluation and Compensation All professionals, including partners, undergo annual goalsetting and performance evaluations. Each professional is evaluated on his or her attainment of agreed-upon goals, demonstration of the appropriate skills and behaviours for their level, and adherence to KPMG Canada values. These evaluations are conducted by performance managers and partners who are in a position to assess performance, and constitute part of our performance management process which is supported by a web-based application. The results of the annual performance evaluation have a direct effect on the compensation of KPMG Canada personnel, including partners, and in some cases on their continued association with the firm. The compensation of our partners is determined annually by our Management Committee and approved by our Board. Compensation is based on professional performance, technical competence, quality and risk management, personal effectiveness, leadership, community service, management skills, and marketplace compensation benchmarks for similarly situated professionals. Our process for setting compensation amounts meets the requirements of Canadian standards and, where relevant, the SEC. Our firm has compensation and promotion policies that are clear, simple, and linked to the performance evaluation process so that our personnel know what is expected of them and what they can expect to receive in return. Partner Admissions Our process for admission to partnership is rigorous and

17 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT 15 thorough, involving appropriate members of our leadership team. The procedure includes a business case and a personal case for the individual candidate. All recommendations for admission to the partnership of KPMG Canada need to be approved by the Board. Assignment Our firm has procedures in place to assign both engagement partners and other professionals to a specific audit engagement by evaluating his or her skill sets, relevant professional and industry experience, and the nature of the assignment or engagement. The business unit leader with the approval of the business unit Professional Practice partner confirms the assignment of an engagement partner to each public company audit client. As part of our process for assigning engagement personnel, each public company and higher risk financial statement audit engagement is assigned an EQCR partner who performs an independent, impartial review of the financial statements and selected audit work papers. These partners consult with the engagement partner on technical matters and provide objective insight into significant engagement issues. Audit engagement partners are required to be satisfied that their engagement teams have appropriate competencies and capabilities to perform audit engagements in accordance with KAM, professional standards and applicable legal and regulatory requirements. Commitment to Technical Excellence and Quality Service Delivery Technical Training Our policies require all professionals to maintain their technical competence and to comply with applicable regulatory and professional development requirements. Audit Learning and Development steering groups at the global, regional and local levels identify annual technical training priorities for development and delivery using a blend of classroom, e-learning and virtual classroom settings. Audit Learning and Development teams work with subject experts to ensure the training is of the highest quality, relevant to performance on the job, and is delivered on a timely basis. Accreditation and Licensing All KPMG Canada professionals comply with applicable professional license rules in the jurisdiction where they practice. Our firm is responsible for ensuring that audit professionals working on engagements have appropriate audit, accounting and industry knowledge and experience in the relevant financial reporting framework. We have accreditation requirements for some of our services (including for US audit and accounting work) which ensure that only partners and employees with the appropriate training and experience are assigned to clients and are appropriately licensed. Our firm requires that all audit professionals maintain accreditation with their professional bodies and satisfy the Continuing Professional Development requirements of such bodies. Access to Specialist Networks Our engagement teams have access to a network of local and global specialists in KPMG member firms. Engagement partners are responsible for ensuring that their engagement teams have the appropriate resources and skills. The need for specialists (e.g. Information Technology, Tax, Treasury, Pensions, Forensic) to be assigned to a specific audit engagement is considered as part of the audit engagement planning process. Consultation Internal consultation is a fundamental contributor to quality and always encouraged and, in certain circumstances is mandated. To assist audit engagement professionals in addressing difficult or contentious matters, we have established protocols for consultation and documentation of significant accounting and auditing matters, including procedures to facilitate resolution of differences of opinion on engagement issues. Consultation with a team member at a higher level of responsibility than either of the differing parties usually resolves such differences. In other circumstances, the matter may be elevated through the chain of responsibility for resolution by DPP. In all such matters, KPMG Canada s Chief Executive Officer and Senior Partner retains the ultimate authority for resolving differences of opinion. KPMG Canada s supervision, review, and consultation policies

18 16 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT and guidance for Audit work include: review and approval of engagement planning and analysis prior to the start of significant fieldwork; review of all work papers by another KPMG professional, including review by the engagement partner and engagement manager of specific audit areas; review of the completion document by the engagement manager, engagement partner and EQCR reviewer which describes all significant findings and issues resulting from the audit and the audit response; assignment of an EQCR partner to all audit engagements of public interest entities (which include reporting issuers and SEC registrants) and higher risk engagements; and provision of policy and guidance in respect of US Generally Accepted Auditing Standards ( GAAS ), US Generally Accepted Accounting Principles ( GAAP ) and International Financial Reporting Standards ( IFRS ) engagements. Technical support for each engagement team comes from a network of Professional Practice, Canadian securities, and SEC filing review partners. Additional support comes from: Technical topic teams assisting engagement teams in resolving technical accounting and auditing/reporting issues and coordinating consultation with the business unit Professional Practice partner or DPP as required. Technical topic teams identify new and emerging issues in an assigned topical area and share best practices in responding to these issues. DPP, which is responsible for conducting technical research, interacting with professional standards-setting groups, and responding to consultation requests. Developing Business Understanding and Industry Knowledge A key part of engagement quality is having a detailed understanding of the client s business and industry. For significant industries global audit sector leads are appointed to support the provision of relevant industry information to audit professionals. A key element of this industry information is the provision of industry knowledge within eaudit. This knowledge comprises examples of industry audit procedures and other information (such as typical risks and accounting processes). In addition, industry overviews are available which provide general and business information in respect of particular industries as well as a summary of the industry knowledge provided in eaudit. Performance of Effective and Efficient Audits KPMG Audit Process Our audit workflow is enabled in eaudit. The key behaviours that our auditors apply throughout the audit process to deliver effective and efficient audits are: insightful, open and honest communication focus on effectiveness of group audits timely partner and manager involvement ongoing mentoring, coaching, supervision and review critical assessment of evidence with emphasis on professional skepticism appropriate involvement of the EQCR reviewer appropriately supported and documented conclusions reporting client confidentiality, information security and data privacy Timely Partner and Manager Involvement To identify and respond to the significant audit risks for each year s audit, the engagement team requires an understanding of the client s business, its financial position and the environment in which it operates. The engagement partner is a key participant in planning meetings, reviews key audit documentation especially documentation relating to significant risks and key audit judgments and is responsible for the final audit opinion. The engagement manager assists the partner in these responsibilities and in the day to day liaison with the client and team. Involvement and leadership from the engagement partner early in the audit process helps set the appropriate scope and tone for the audit and helps the engagement team obtain maximum benefit from the partner s experience and skill. Timely involvement of the engagement partner at other stages of the engagement allows the engagement partner to identify and appropriately address matters important to the engagement, including critical areas of judgment, significant risks and other areas the

19 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT 17 engagement partner considers important. Critical Assessment of Evidence With Emphasis on Professional Skepticism We consider all audit evidence obtained during the course of an audit, including consideration of conflicting or missing evidence. The nature and extent of the audit evidence we gather is responsive to the assessed risks. The analysis of the audit evidence requires each of our team members to exercise professional judgment and maintain professional skepticism to obtain appropriate audit evidence. Professional skepticism involves a questioning mind and alertness to inconsistencies in evidence. Professional skepticism features prominently throughout auditing standards and receives significant focus from regulators. Our Audit Quality Framework emphasizes the importance of maintaining an attitude of professional skepticism throughout an audit. We have developed a professional judgment process that provides audit professionals with a structured approach to making judgments, which has skepticism at its foundation and recognizes the need to consider alternatives and to consider conflicting as well as confirming evidence. Ongoing Mentoring, Coaching, Supervision and Review We understand that skills build over time and through exposure to different experiences. To invest in the building of the skills and capabilities of our professionals, without compromising on quality, we use a continuous learning environment. We support a coaching culture throughout KPMG Canada as part of enabling personnel to achieve their full potential. Supervision during an audit involves tracking the progress of the engagement and the engagement team, including: considering the competence and capabilities of the individual members of the engagement team, including whether they have sufficient time to carry out their work, whether they understand their instructions, and whether the work is being carried out in accordance with the planned approach to the engagement addressing any significant matters arising during the engagement, considering their significance and modifying the planned approach appropriately identifying matters for consultation with more experienced team members during the engagement A key part of effective supervision is timely review of the work performed so that significant matters are promptly identified and addressed. Appropriately Supported and Documented Conclusions Audit documentation records the performed audit procedures, evidence obtained and conclusions reached on significant matters on each audit engagement. Our policies require review of documentation by more experienced engagement team members. Our methodology recognizes that documentation prepared on a timely basis helps to enhance the quality of the audit and facilitates the effective review and evaluation of the audit evidence obtained and conclusions reached before our report is finalized. Teams are required to assemble a complete and final set of audit documentation for retention within an appropriate time period. Our firm has a formal document retention policy in accordance with applicable law, regulation and professional standards that governs the period we retain audit documentation and other clientspecific records. Appropriate Involvement of the EQCR Reviewer EQCR reviewers have appropriate experience and knowledge to perform an objective review of the decisions and judgments made by the audit team. They are experienced audit professionals who are independent of the engagement team. They offer an objective review of the more critical and judgmental elements of the audit. An EQCR reviewer is appointed for the audits of all listed entities and of other engagements identified as high public profile or high risk. Before we issue an audit report, these individuals review: Selected audit documentation and client communications The appropriateness of the financial statements and related disclosures The significant judgments the engagement team made and the conclusions it reached with respect to the audit The audit is completed only when the EQCR reviewer is satisfied that all significant questions raised have been resolved. We are continually seeking to strengthen and improve

20 18 KPMG LLP (CANADA) 2014 TRANSPARENCY REPORT the role that the EQCR plays in audits, as this is a fundamental part of our system of audit quality control. Reporting Auditing standards largely dictate the format and content of the audit report that includes an opinion on the fair presentation in all material respects of the client s financial statements. Experienced auditors arrive at all audit opinions after involvement in and review of the work performed by the audit team. We provide extensive reporting guidance and technical support to audit partners in preparing audit reports where there are significant matters to be reported to users of the audit report, either as a qualification to the audit report or through the inclusion of an emphasis of matter paragraph. Insightful, Open and Honest Communication Establishing open communication is of the utmost importance to audit quality, especially for those who are charged with governance toward our clients. Often the audit committee will be the group identified as those charged with governance. We stress the importance of keeping those charged with governance informed of issues arising throughout the audit and of understanding their views. We achieve this through a combination of reports and presentations, attendance at audit committee or board meetings, and ongoing discussions with members of the audit committee. We deliver insights such as our assessment of the appropriateness of significant accounting practices and policies, accounting estimates and financial statement disclosures, significant deficiencies in the design and operation of financial reporting systems and controls when such deficiencies come to our attention during the course of the audit, and any uncorrected misstatements. We share our industry experience to encourage discussion and debate with the members of the audit committee. KPMG Canada emphasizes open, candid dialogue with audit committees. Some of the items that we discuss include: Accounting policies and alternative treatments, particularly those that are significant Quality of the accounting principles applied by the client Significant management judgments and accounting estimates Audit adjustments and uncorrected misstatements Other information in documents containing audited financial statements Disagreements with management Consultations with other accountants Major issues discussed with management prior to retention Difficulties encountered in performing the audit Fees for audit and non-audit services For audit clients that are SEC registrants, our audit committee communications are supplemented to meet US requirements. Focus on Effectiveness of Group Audits The conduct of group audits is one of the key aspects of our role and our KPMG audit methodology covers this in detail. We work effectively with component auditors. The group audit engagement partner is required to evaluate the competence of component auditors, whether they are KPMG member firms or not, as part of the engagement acceptance process. Additional guidance has been issued in this area and heightened